The Commodity Futures Modernization Act (CFMA) of 2000 regulates futures clearinghouses. The CFMA permits clearinghouses to participate in the clearing of Over the Counter (OTC) derivatives. Prior to the CFMA, OTC contracts had to be cleared “bilaterally,” that is, between the two counterparties to a contract. After the CFMA, OTC contracts could be cleared “multilaterally,” that is, collectively across multiple OTC counterparties through a central clearinghouse.”
Futures clearinghouses, including the NYMEX clearinghouse, offers products that facilitate OTC clearing. The clearinghouses offer for example OTC clearing services on selected energy products. The clearinghouses convert OTC positions into futures positions and then clears the futures positions. OTC positions are converted to futures through a transaction called an exchange of futures for swaps, or EFS transaction. The parties to EFS are allowed to privately negotiate the execution of an OTC swap and related futures transaction on their own pricing terms. To initiate an EFS position a market participant must work through a member of the clearinghouse. The clearing member is responsible for evaluating the creditworthiness of the market participant.
Certain types of derivative contracts such as interest rate swap contracts are traded in a bilateral manner in an OTC market between buyers and sellers and have not traditionally been traded on an electronic exchange with a clearinghouse as a counter-party (e.g., multilateral clearing). Because these contracts have not been traded on an electronic exchange with a clearinghouse as a counter-party, certain efficiency, accuracy, and transparency in the use of technical components of the exchange have not been realized. For example, accurate and timely management of the computer system for providing the exchange, and accurate and timely data management, data presentation, margin management, and other financial risk management of the trading system itself has not been needed or realized.
Moreover, bilateral trading without the use of an accurate, timely, and risk managed electronic exchange (e.g., using a computer system) creates systemic risk in the financial system, that for example, is attributed in part to the financial crisis in the second half of 2008. Risks of defaults by the bilateral parties also increase transaction costs and create risks in the global financial markets. A lack of an open exchange and a lack transparency of the costs and values of these derivative trading also create systemic risk, for example, the risk that failure of a single market participant having a disproportionate effect on the overall market, the risk of financial bubbles and dangerous imbalances, or the like. Therefore, it is with respect to these problems and others that the current invention is directed.